CITY AND SUBURBAN
A new commander changes the guard at the Stock Exchange
CHRISTOPHER FILDES
The City got Andrew Hugh Smith wrong. When he was chosen to follow Sir Nicholas Goodison as chairman of the Stock Exchange, it was taken for the old guard's last stand. Ever since then he has been changing the guard.
This had not been expected from a pillar of the City's most widely established dynasty, the financial Smiths. From one eighteenth-century Nottingham banker de- scend the Hugh Smiths and Abel Smiths and Smith Dorriens and Pauncefotes (real- ly Smiths) and Smiths, the Lords Bicester (late of Morgan Grenfell) and Carrington (the first was ennobled after lending pa- tiently to William Pitt the Younger). Mr Hugh Smith himself had for long been a broker with the old firm of Capel-Cure Carden, now renamed for its new Austra- lian owners. He was also chairman of Holland and Holland, gunsmiths to the gentry. At the Stock Exchange he was chosen by a self-perpetuated electoral col- lege. None of this seemed the stuff of Which reformers would be made.
What this conspectus missed is the new chairman's formative years, spent — most unusually for a broker — in industry. He was a young manager at Courtaulds when a new chairman, Frank (now Lord) Kearton, was forcing through his programme of radical change. The Exchange in the 1980s, like Cour- taulds a quarter of a century earlier, had been forced onto the defensive. Its instinct was to dig in for what was left — like the Options market, the last of whose dealers Still trade face to face on the Exchange's floor. Mr Hugh Smith is more of a digger- out.
He sees nothing sacred in floor trading, or even in the historic site in Throgmorton Street and the Stock Exchange Tower itself. His views on its architecture are in line with the Prince of Wales's. 'We don't feel it must be an historic monument, for ever', he says. 'It's an asset in a balance- sheet. It's been a very good investment. The Tower is now full of communications equipment, expensively installed, which means that the Exchange cannot just put the 'For Sale' sign up. Instead it is pulling back from the numerous and necessarily expensive offices in which it houses its staff, around the City.
Half of the staff work on the electronic Systems on which the Exchange had bet so heavily. That is not how the new chairman bets. He thinks that the Exchange must stand or fall, not by the systems it devises, but by its markets. 'The systems are there for the markets — not the other way round.' He first made his mark as chairman by tackling the most troublesome system of all — Taurus, which was supposed to take the paperwork out of share ownership and the settlement of bargains. Taurus has been a year or two away for a number of years, while its prospective customers, led by the banks, have grumbled ever more loudly.
Rather than dig in behind Taurus, Mr Hugh Smith is digging the Exchange out. His plans have been to bring the grumbling customers into the project as partners, setting up a separate Taurus company in which they will be shareholders. He has still to overcome the big companies' wor- ries about spotting enemies on their share registers — and the Government's less excusable belief that small shareholders must have old-fashioned share certificates, which do so much to put up the cost of share ownership. `I hope we're close', he says, `to a defined solution to the Taurus problem.'
A change now imminent is the appoint- ment of a new chief executive. Jeffrey Knight, chief executive since 1986, has spent his whole career with the Exchange. The new man will almost certainly come from outside.
The job itself has changed, the chairman says. In the old, uncomplicated days it was very much a job for a regulator, and the Exchange itself was without doubt the best example of self-regulation in the City. Now much of the regulators' work has been taken from the Exchange — crossing to the other side of a Chinese wall in the Tower, to be done by the Securities Association. At the same time the Exchange's mem- bership and its operations have been trans- formed.
All this has changed the chairman's job too. Sir Nicholas Goodison was a chairman in the public eye, at home with matters of high policy. Mr Hugh Smith sees himself as more concerned with day-to-day issues. The job, he says, is in effect full-time, and he is paid for it — the Exchange's first salaried chairman.
The next change, still in the wind, concerns the old guard most directly. At issue is the Exchange's system of share trading, now handled through the market- making firms, who have accepted the privileges and obligations of their role. Some have lost fortunes like that. Not surprisingly, the big market makers wanted the balance of privilege and obligation shifted. They have had two such shifts, and the study group which recommended them has since suggested more refinements to the system, in a long and technical report.
What shook the market-makers was to find that Mr Hugh Smith had commis- sioned two more reports — one of them, from the consultants at Touche Ross, calling the whole system of market-making into question. The Big Bang, Touche Ross said, had only been a middle-sized pop, it had let the old structure of brokers and jobbers survive in a new guise, it was still an artificial structure and could only be held together by ever more elaborate rules. Instead the market makers' doubtful pri- vileges should be thrown open to all, and the Exchange should move towards an 'order-driven' system in which its role would be to match buyers with sellers.
The whole subject is under review, and- meanwhile the pressures on the market makers have abated — some are making money, though none of them, surely, can say that their capital is earning its keep. They have learned to distinguish their chairman from their spokesman. Mr Hugh Smith recognises that no-one owes the Stock Exchange a living, and that Europe and the world will not necessarily adapt their systems or their share-trading to fit London's. He sees huge scope in Europe for international business, but does not assume that it will come to London, or even to any exchange. If stock exchanges are not competitive, modern information technology could bypass them altogether. What will matter, he says, is to bring the order flow together in one place: 'If we don't do it, someone else will.'
From outside the Exchange, a figure in City authority says: 'Andrew Hugh Smith isn't the last of the old chairmen. He's the first of the new.'
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